If anyone still needed convincing of the need to reform the Vatican’s troubled “bank,” the June 28 arrest of a senior official at the Institute for the Works of Religion (IOR), and the subsequent July 1 resignations of Paolo Cipriani, director, and Massimo Tulli, deputy director, seemed to provide it.

The Institute for the Works of Religion, popularly known as the Vatican bank, is seen in a 2009 photo. CNS photo/L’Osservatore Romano via Catholic Press Photo

Just days after Pope Francis appointed a five-person panel to review the mission and activities of the IOR, Italian financial police arrested Msgr. Nunzio Scarano, a senior accountant in the Vatican, together with an intelligence agent and a broker, after allegations of suspicious transactions involving shipments of $26 million across borders and the recycling of cash as Church donations.

Cipriani and Tulli stepped down saying their removal was “in the best interest of the institute and the Holy See.” Ernst von Freyberg, president, will be interim director.

The arrests are not the first time the Vatican bank has been suspected of being used to “launder” money. In 2010, accusations that it had been used to recycle mafia money led to Roman magistrates freezing $33 million that the IOR held in an Italian bank, claiming it had violated transparency protocols.

The Vatican denied the charges, and the funds were later released, but the scandal led to the removal of the IOR’s head, Ettore Gotti Tedeschi, and a review of the bank’s accounts. Pope Emeritus Benedict XVI then put in place a series of reforms designed to bring the IOR in line with international norms governing transparency and accountability. The reforms have involved the IOR opening itself up to external scrutiny, renouncing its traditional secrecy and opting to explain itself to the Church and to the world.

Increased accountability

About the Bank

Because it doesn’t lend money or make direct investments, the Institute for the Works of Religion is not arguably a bank at all — and most of the $7 billion it manages doesn’t belong to the Vatican itself, but to religious orders, dioceses and Catholic organizations across the world. For them, it offers an invaluable service: a means of holding funds and moving them to where they’re needed. The IOR employs 112 people, has 19,000 customers and by normal bank standards is very highly capitalized, with an equity of roughly $1.04 billion on a balance sheet of $6.5 billion.

The IOR manages the funds deposited there by religious orders and Vatican employees, and invests it in government and corporate bonds and in other banks, receiving a slightly higher interest rate than it gives to its customers. The surplus made from the investments — around $71.6 million — are used to fund humanitarian projects identified by the Vatican’s charitable arm, Cor Unum.

The IOR was established in 1942 by Pope Pius XII. It operates nowadays as an institution located inside Vatican City, and (like Lichtenstein or other small states in Europe) outside EU rules. It has no shareholders and is run by a professional CEO who reports directly to a committee of five cardinals — and ultimately to Pope Francis.

Pope Benedict created a new watchdog, the Financial Intelligence Authority, to oversee the IOR’s activities and brought in a Swiss lawyer with an outstanding reputation in cleaning up European banks — René Brülhart — to sign cooperation agreements with watchdogs abroad.

Most far-reaching has been the Vatican’s deal with Moneyval, the Council of Europe’s anti-money laundering agency, to ensure full compliance with international standards. Moneyval auditors were given access to a large number of confidential legal documents — the first time the Vatican has allowed such independent external scrutiny of its financial affairs. The agency applauded the Vatican for “coming a long way in a short time” toward greater financial transparency but called for greater external oversight of the bank. The IOR agreed to put right the deficiencies, and a new audit was scheduled — due this month — to assess whether it has done so.

One of Pope Benedict’s last acts before his resignation was to appoint von Freyberg. The lay president announced that the IOR would publish its annual results online, was tightening its procedures and would “review every single deposit” by the end of the year.

Further scrutiny

Pope Francis, however, appears to want something more radical than a cleanup. During the General Congregations — the cardinals’ meetings before the March conclave — the IOR was frequently cited as an example of how dysfunctions in the Vatican’s bureaucracy undermined or distracted from the pope’s wider mission.

On June 15, Pope Francis named a trusted associate, Mgsr. Mario Salvatore Ricca, a diplomat who runs Church residences, as the bank’s “prelate.” Because the prelate has privileged access, reports to the commission overseeing the bank and attends board meetings, the appointment was seen as a way for the pope to get information directly.

Then came the announcement of the commission appointed to report on how the IOR can be harmonized with the pope’s mission. The statement by the Secretariat of State made clear that this was part of a broader review of the curia, reflecting “the desire of the Holy Father to learn more about the juridical position and activities of the Institute to enable better harmonization of said Institute with the mission of the Universal Church and the Apostolic See, in the more general context of reforms that should be carried out by the institutions that aid the Apostolic See.”

Focus on mission

Significantly, the commission includes two Americans and only one Italian — the others are French and Spanish — but all are heavyweights who know the Vatican well. American Msgr. Peter Wells is the asesore, or No. 3 in the Secretariat of State. He is known for his strategic brilliance and understanding of the need for reform and is the link to the hub of the Vatican. Cardinal Raffaele Farina, the former head of the Vatican library, brings experience as manager of a large Vatican institution, while Cardinal Jean-Louis Tauran is a former top diplomat and a member of the body of cardinals that oversees the IOR. Bishop Juan Ignacio Arrieta, secretary of the Pontifical Council for Legislative Texts, brings vital juridical knowledge, while Harvard law professor Mary Ann Glendon, former U.S. ambassador to the Holy See and now president of the Pontifical Academy of Social Sciences, is admired for her intellect and common sense.

The commission does not imply that Pope Francis lacks confidence in Von Freyberg or the IOR’s journey to greater transparency and accountability; that technical process, with Moneyval, is well underway. Rather, the commission is made up of people who understand the pope’s mission: to serve the universal Church and above all to evangelize. The question for the commission will be: Does the IOR in its current form and with its current purpose enhance or undermine that mission?

And if it does not assist, how can it be made to reflect that purpose? Can the Vatican run a financial institution that doesn’t just not cause scandal, but which embodies the Gospel’s message about stewardship of the things of this earth?